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OPSM 301 Operations Management Class 22: Aggregate Planning (Chapter 13) Koç University Zeynep Aksin

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Presentation on theme: "OPSM 301 Operations Management Class 22: Aggregate Planning (Chapter 13) Koç University Zeynep Aksin"— Presentation transcript:

1 OPSM 301 Operations Management Class 22: Aggregate Planning (Chapter 13) Koç University Zeynep Aksin

2 Announcements  Reminder: Midterm 2 next Tuesday on 20/12 at 17:00 CAS-Z08  Aggregate Planning: will skip AP in services; however OPSM 405 Service Operations Management has an extensive module on this topic  Linear Programming: Quantitative Module B; will skip graphical solution and sensitivity analysis parts

3 Example 2: Finding C u and C o A textile company in UK orders coats from China. They buy a coat from 250€ and sell for 325€. If they cannot sell a coat in winter, they sell it at a discount price of 225€. When the demand is more than what they have in stock, they have an option of having emergency delivery of coats from Ireland, at a price of 290. The demand for winter has a normal distribution with mean 32,500 and std dev  How much should they order from China??

4 Operations Planning Order Scheduling Material Requirement Planning Master Production Scheduling Daily workforce and customer scheduling Weekly workforce and Customer scheduling Aggregate Planning Strategic Capacity Planning Process Planning Long range Medium range Short range Manufacturing Service

5 Relationships of the Aggregate Plan Aggregate Plan for Production Demand Forecasts, orders Master Production Schedule, and MRP systems Detailed Work Schedules External Capacity Subcontractors Inventory On Hand Raw Materials Available Work Force Marketplace and Demand Research and Technology Product Decisions Process Planning & Capacity Decisions

6  Provides the quantity and timing of production for intermediate future –Usually 3 to 18 months into future  Combines (‘aggregates’) production –Often expressed in common units Example: Hours, dollars, equivalents (e.g., FTE students)  Involves capacity and demand variables Aggregate Planning

7  Meet demand  Use capacity efficiently  Meet inventory policy  Minimize cost –Labor –Inventory –Plant & equipment –Subcontract Aggregate Planning Goals

8 Aggregate Planning Strategies Pure Strategies  Capacity Options — change capacity: –changing inventory levels (recall from earlier session that these are known as seasonal inventory) –varying work force size by hiring or layoffs –varying production capacity through overtime or idle time –subcontracting –using part-time workers

9 Aggregate Planning Strategies Pure Strategies  Demand Options — change demand : –influencing demand –backordering during high demand periods –counterseasonal product mixing

10 Aggregate Scheduling Options - Advantages and Disadvantages

11 Advantages/Disadvantages - Continued

12 OptionAdvantageDisadvantageSome Comments Using part-time workers Less costly and more flexible than full-time workers High turnover/training costs; quality suffers; scheduling difficult Good for unskilled jobs in areas with large temporary labor pools Influencing demand Tries to use excess capacity. Discounts draw new customers. Uncertainty in demand. Hard to match demand to supply exactly. Creates marketing ideas. Overbooking used in some businesses.

13 Advantage/Disadvantage - Continued

14 The Extremes Level Strategy Chase Strategy Production equals demand Production rate is constant

15 Example 1: Monthly sales forecasts ($ million) Jan Feb Mar Apr May Jun. July Aug Sept. Oct. Nov. Dec Total sales for the year = $130 million

16 Cumulative Chart Cumulative sales forecasts ($ million) Jan Feb Mar Apr May Jun. July Aug Sept. Oct. Nov. Dec. 120-

17 Chase Strategy Cumulative sales forecasts ($ million) Jan Feb Mar Apr May Jun. July Aug Sept. Oct. Nov. Dec Cumulative sales and cumulative production

18 Level Strategy Cumulative sales forecasts ($ million) Jan Feb Mar Apr May Jun. July Aug Sept. Oct. Nov. Dec Cumulative sales Cumulative production shortage excess

19 Labor Capacity Requirements January February March April May ….… … ….. …. …. December Total Sales in labor-hours (000)s Working days Variable work force Variable work week Variable inventory Chase Strategy Level Strategy

20 Illustration of calculations  Level production –Total sales = $130 million –Total labor-hours required = $130 million/$30 = M labor-hrs. –Total hours = 243 days. 8 hrs/day = 1944 hrs –Number of workers = M / 1944 = 2229  Variable workforce for January –Sales in labor-hours = $7.6 M /$30 = 253,333 –Working hours = 20 days. 8 hrs/day = 160 hours –Variable work force = 1581

21  Variable workweek for January –Sales in labor-hours = $7.6 M /$30 = 253,333 –Number of workers = 2229 (average required, constant) –Variable monthly load for a worker = 253,333/2229 = –Variable workweek = /4 = 28.4 hours/week  Variable inventory for January (Level production) –Production in January = (2229 workers)(20 days/month)(8 hrs/day) = 356,640 –Demand for January = 253,333 (labor-hours) –Inventory = 103,307 labor-hours –Inventory ($) = (103,307)($30/labor-hour) = $309,920

22 Evaluating Alternatives  Hiring cost = $200 per employee  Firing cost = $500 per employee  Regular labor cost = $5 per hour  Overtime premium cost = $2.5 per hour  Undertime premium cost = $3 per hour  Inventory carrying cost = 2% per month (applied to the monthly ending inventory)  Beginning labor force = 1,583 persons  Beginning inventory = 0

23 Alternative 1: Variable Workforce Zero-inventory, hire-fire as required Starting Required Hire-fireCost Workforce January1,583 1, February1,583 1, $16,800 March1,667 1, $36,200 April1,848 1, $5,400 May1,875 2, $72,000 June 2,235 1, $454,500 ….….. ……. ……. ……... December3,292 2, $417,000 Total $2,708,300

24 Alternative 2: Level Production constant worforce :2229, Variable Inventory Initial hire = ( ) = 646 Cost = 129,200 Initial Production Required Ending Cost Inventory (labor-hours) Inventory January 0 356, , ,307 $ ….….. ……. ……. ……... Total $1,882,420

25 Example 2: National Steel Corporation (NSC) produces a special-purpose steel used in the aircraft and aerospace industries. The Sales Department of NSC has received orders of 2400, 2200, 2700, and 2500 tons of steel for each of the next 4 months. NSC can meet these demands by producing the steel, by drawing from its inventory, or by using any combination of the two alternatives.

26  The production costs per ton of steel during each of the next 4 months are projected to be $7400, $7500, $7600, and $7650. Because costs are rising each month-due to inflationary pressures- NSC might be better off producing more steel than it needs in a given month and storing the excess.  Production capacity cannot exceed 4000 tons in any one month. The monthly production is finished at the end of the month, at which time the demand is met. Any remaining steel is then stored in inventory at a cost of $120 per ton for each month it remains there.

27  If the production level is increased from one month to the next, then the company incurs a cost of $50 per ton of increased production to cover the additional labor and/or overtime. Each ton of decreased production to cover the additional labor and/or overtime. Each ton of decreased production incurs a cost of $30 to cover the benefits of unused employees.  The production level during the previous month was 1800 tons, and the beginning inventory is 1000 tons. Inventory at the end of the fourth month must be at least 1500 tons to cover anticipated demand. Formulate a production plan for NSC that minimizes the total costs over the next 4 months.

28 Data for the Production-Planning Problem of NSC Month Demand (tons) Production cost ($/ton) Inventory cost ($/ton/month) Starting inventory = 1000 tons Ending inventory (at the end of 4th month) = 1500 tons Starting production level = 1800 tons Cost of changing production level = $50 per ton (increase) $30 per ton (decrease)


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